UK Stock Market Valuations and Expected Future Returns

Country: UK (updated daily) check out Global Overview for detailed methodology.

Ratio of total market cap over GDP: Maximum - 201%; Minimum - 47%; current - 112%
Expected future annual return: 8.8%

ETF Used for dividend yield: EWU (Yield=4.45%)
Market Index used: FTSE 100 index
Current Annual GDP: $2,721 billion US dollars or 2,089 in billions of national currency (GDP in Local Current Prices Annual Growth=3.75%)
Data since year 1972

UK Historical GDP Growth

Historical GDP of UK in billions of national currency. The GDP in local current prices has grown at the annual rate of 3.75% over the past 8 years. Please note this growth rate includes the effect of price inflation and it is NOT the real GDP growth rate. Current Annual GDP: $2,721 billion US dollars or 2,089 in billions of national currency.

Historical Stock Market Cap

Historical total market of UK in billions of national currency. This value is normalized using the data published by WorldBank. FTSE 100 index is used for the normalization. Represents about 80% of total market index in UK, back to 1982. Use total market cap number of 1.8 trillion pounds as of June 30, 2011 to normalize FTSE All share index to total market cap.

Historical Ratio of Total Market Cap over GDP (%)

The current ratio of total market cap over GDP for UK is 112%. The historical high was 201%; the historical low was 47%. If we assume that the ratio will reverse to the historical mean of 117% over the next 8 years, the contribution to expected annual return is 0.6%. This is the detailed historical chart of the ratio.

Predicted and Actual Returns

From the equation presented on the U.S. market valuation page,

Investment Return (%) = Dividend Yield (%) + Business Growth (%) + (Re/Rb)(1/T)-1

We can compute the predicted and actual returns of the UK stock market over a given time period, T. In the calculation, we set T to equal eight years, the approximate length of a full economic cycle. The calculated results are presented in the chart below. The green line indicates the expected, or predicted return if the market ratio trends near the average ratio of 117% over the next eight years.

The blue line indicates the actual, annualized return of the UK stock market over eight years. We use “FTSE 100 index” to do the actual return calculation. We can see the calculations largely predicted the trend in the stock market as the blue line is closely parallel to the green line.

Conclusion

The stock market of UK is expected to return 8.8% a year for the coming years. This is from the contribution of economic growth in local current prices: 3.75%, Dividend Yield: 4.45% and valuation reverse to the mean 0.6%.

This is the projected return of the stock market in UK relative to other countries. Click on each bar in the chart to go to other countries:


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